Install App

TRUMPS CHOICE: DEFAULT ON U.S. TREASURY DEBT OR CUT MEDICARE, MEDICAID AND SOCIAL SECURITY

Neil Baron

Updated on:

In the end, Trump and the Republicans will have to choose between defaulting on America’s debt or cutting benefits like Medicare, Medicaid and Social Security. One bet is that benefits will be cut because Republican politicians enabled our unsustainable debt to justify cutting federal medical and retirements entitlements. My bet is that Trump, aided by his obedient Republicans and his Supreme Court majority, will find an excuse and the precedent to default.

Start with the most recent and relevant of the four instances in which the U.S. failed to make timely payments on its debt.

  1. In 1979 the U.S. defaulted on its Treasury bills due in part to an ongoing Congressional debate over raising the debt ceiling. Does it sound disturbingly applicable?
  2. In 1790, after United States assumed the states” Revolutionary War debt, Congress deferred interest payments until 1801.
  3. In 1861-2, to help pay for the Civil War, the U.S. printed greenbacks with the obligation to redeem them for gold, which was retroactively repudiated by Congress.
  4. In 1933, Liberty Bonds issued to prosecute World War I were required to be redeemed for gold. Because the bond amounts exceeded the country’s gold reserves, and because President Roosevelt decided it was a good idea to depreciate the currency in the economic crisis of the time, the government reneged on the obligation.

Add that we’ve already exceeded the $36.1 trillion debt ceiling with $36.22 trillion of debt, and that Trump’s budget, which was passed by the House, raises the debt ceiling by $5 trillion  to cover the revenues lost by his tax cuts. Although, historically, debt ceiling increases have been used  to enact deficit reduction or facilitate budget reforms, the House’s instructions would allow the deficit to increase by $2.8 trillion, and the Senate’s instructions would allow an increase of $5.8 trillion.

Leaving aside that Trump is irrational, can’t control himself and is unaware of the consequences of his decisions – think his catastrophic tariffs, ending foreign aid, freezing federal financial assistance programs – it’s important to consider reckless attitude towards debt.

In May of 2016 Trump said, “I am the king of debt… I love debt. I love playing with it. I would borrow, knowing that if the economy crashed, you could make a deal,” i.e., you could default.  We didn’t take him seriously then. But now, after the catastrophes he’s wreaked on our country, we need to.

From the world’s biggest banks to America’s smallest contractors, Trump defaulted to creditors in America and elsewhere, and filed six of his projects into bankruptcy, stiffing the workers who built them.

Moreover, his extreme and unthinkable behavior has eroded investors’ confidence in U.S. Treasury debt as the world’s safest haven and has driven up the interest costs on the country’s 10-year bond from 3.8% to 4.25% in just a few days. The 10-year rate is the benchmark for many types of loans in the U.S. and around the world, including residential and commercial mortgages, corporate bonds, consumer loans and auto loans. So the spike in the 10-year rate will increase borrowing costs across the board and be a heavy weight on our and the global economies, which could move America into a recession that Trump is likely to mismanage into a depression. The odds of a recession have varied between 45 and 60%, but are as volatile as Trump’s tariff announcements, which is not a reliable indicator of economic stability for investors.

The biggest threats to America’s economy are Trump and his Republican enablers who confirmed the most unqualified and dangerous cabinet in our history out of fear of being primaried by a challenger picked by Trump and financed by Elon Musk. Sadly, Trump’s confidence that Republican Senators would confirm such an unfit cabinet expose his contempt  for them. Ironically, these Republican enablers are more likely to be replaced by a primary challenger with the spine to confront Trump, or a Democrat in a national election. Republicans have a better choice: impeach him and reverse the intolerable consequences of his presidency.

Leave a Comment